Medical Robbery

In a previous post I used life expectancy and infant mortality figures to show that the price gouging is not getting us better healthcare. A survey of eleven advanced countries by the Commonwealth Fund, besides corroborating the high costs of American healthcare in comparison to other rich countries, shows that the level of service in America leaves something to be desired. Among its findings the US ranked:

• second worst in getting a same-day or next-day appointment
• third worst in having to wait six or more days for an appointment
• third worst on hearing back on the same day after calling a doctor
• the worst in making arrangements for after-hours service with a doctor or nurse
• the worst in having to use the emergency room in the past two years
• the worst in being able to email the doctor's practice with questions
• the worst on spending for health insurance administration
• the worst in the number of respondents indicating the system worked well

Perhaps some of this poor service is explained by the fact that in the OECD (the club of advanced countries referred to before) there are on average 3.2 physicians per 1,000 people. In the US there are only 2.5. To hit average we would need over 230,000 more doctors in the country.

Medical Robbery

The rampant price gouging in the medical industry has terrible impacts on the economy as a whole. The OECD, club of mostly rich countries, estimates that the United States dedicates nearly 18% of its economy to healthcare. The average for the OECD as a whole is just a bit above 9%. That is, on average we're spending double on medical services compared to the other rich countries. In money terms this is about $1.3 trillion dollars per year! That's over a trillion dollars that could go to education, roads, investments or other productive uses. But because it's not there for those productive uses, the economy finds it more difficult to grow. Year after year this dead weight on the economy gets heavier and heavier, ironically making it more and more unhealthy.

But are we getting any good results for all that extra money spent on healthcare? Not by two generalized measures of medical well being: life expectancy at birth and infant mortality. For the OECD as a whole life expectancy at birth is 80.1 years. For the US it's only 78.7. Infant mortality for the OECD is 4.1 per 100,000 births. For the US it's 6.1. In the big scheme of things we're simply not getting value for our medical money.

Translated to the individual level, the price gouging results in depressing wages and in mushrooming personal debt. Average premiums for group insurance among US employers is running around $6,000 for single coverage and $16,000 for family coverage, of which the employer pays $5,000 and $12,000 respectively. So an employee with a family costs an employer $1,000 per month even before the employee gets to take the first dollar home! With this burden it is easy to see that an employer may have a hard time giving generous raises and why many opt out of offering health insurance altogether. Seen another way, if we were dedicating the same proportion of the economy to medical costs as the average OECD country (about half of what we are), that employee could be getting an $8,000 raise (half of $16,000). We should take this into account the next time we think "health insurance" is paying our medical bill.

But we know that even when we have health insurance, it doesn't pay for everything. Injury or disease can still cost a family thousands of dollars. As can childbirth. This spot on ABC World News yesterday tells the story of a $50,000 bill for childbirth. So we should perhaps not be surprised that NPR's Science Friday reports that over 60% of personal bankruptcies in this country are precipitated by medical bills. Or that the Kaiser Family Foundation reports that 32% of non-elderly adults are having difficulties in paying medical bills.

I've explained in a previous post that a lack of competition and of transparency make this price gouging possible. Before explaining how all unsustainable this is, I'd like to step back and offer some reasons why such lack of competition and transparency can persist in an American economy that is overall pretty competitive and transparent. That'll be a subject for the next post.

Medical Robbery

You may ask, if your local grocery store can't get away with price gouging, how can your local hospital do so? Economists will tell you that in a private market prices get established by demand and supply. If you don't like the price of eggs at one supermarket, you can go to another and check out the prices there. But if you're sick or injured, you're not going to bargain with a hospital before you're admitted; your bargaining power is zero. So your demand for eggs is totally different from your demand for health services. On the supply side, the hospital also has some great advantages that the grocery store doesn't have, unfair advantages that make the whole market system break down.

If a grocery store is making a killing, somebody is going to get the notion of putting up another store like it not too far away. However in the case of hospitals in most states an entrepreneur needs to get a "certificate of need" if he wants to get a permit for opening a facility not far away from another one already there. The entities that issue these certificates tend to be uncannily aligned with the hospital already present. The result is that potential competition is throttled. We're not likely to see hospitals vying for business across the street from one another like gas stations do.

The other trick that hospitals get away with is a total lack of transparency. There is usually no way of knowing what price they will charge for which service until long after the fact. With a supermarket analogy, it's like going to the meat counter, seeing no prices, grabbing a steak, going through the checkout line without a receipt, and sometime later in the month you get a statement saying the steak cost you $500.

Most any economist will tell you that without transparency and competition markets can't work well. Suppliers can charge as they please, especially for an essential service customers are hard pressed to do without. Moreover, there is no incentive to improve efficiency or quality because the cost of waste can be simply passed on to the customer. And bad outcomes can hide behind a veil of secrecy.

In the case of my son the attending physician, without any apparent shame, charged $1,240 for a few seconds' (not minutes') worth of consultation. Even if she had spent an entire hour to exclusive attention for my son, $1,240 would still be a an hourly fee even the most expert professionals in other fields would love to get away with. But it's common in the opaque, uncompetitive world of medical services.

This broken market for medical services impacts not only individuals, but the nation as a whole. Some sad details will follow in the next installment.

Medical Robbery

This blog is about an "industry" that affects just about all of us. In our modern society almost everyone has been to a doctor or hospital at one time or another. Sometimes the visits are for minor conditions, sometimes for life-threatening ones. But in either case we seldom ask what it's going to cost. And if we did, whoever is providing the service will have no idea. All that billing stuff is done elsewhere by someone else. At the time of the visit all the the office people want to know is if you have "insurance" and if you have a "co-pay," a usually small, fixed amount you pay per visit.

The quality of the medical service you receive may be good, bad or indifferent. The fact that doesn't change is that unless you have Medicare, the bill will be astronomical. And you'll find out about it only long after you've left the medical facility. When you open the envelope, you'll feel like a victim of a medical robbery. You may feel better in that "insurance" will pay all or a major portion of it. But as we shall see in a future post, that really just ain't so.

What prompts me to begin this blog is my son's visit to an emergency room for severe dehydration last April. They gave him two bags of saline solution in an IV, and the bill came out to be over $4,000. As an economist and as someone who manages a company's health plan, I see that this case, although relatively small, is nonetheless a clear example of how broken the American medical system is. It is slowly seeping the life out of the American economy while it continues on a path that is ultimately unsustainable.

In the course of this blog I plan to update on what happens as I refuse to pay the different emergency room bills my son accrued, asking the service providers to give some justification for what is commonly referred to as price gouging. As I do, I also plan to explain how this gouging becomes possible to begin with and what its effects are on individuals and on the economy as a whole. I hope you find the blog interesting and informative.